Y H & C Investments Monthly Newsletter- July 2018 Edition #121

US. Economic & Financial Markets Outlook: Economy, Business and Consumer Confidence Neutralized by Tariffs and Fed Tightening!

(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

In June, the Dow Jones Industrial Average fell 1.48 %, the S&P 500 lost .59%, and the NASDAQ dropped .61 %. With half of the year in the books, let’s take a look where each of the indexes stand. The Dow is essentially flat (-1.81%), with the S&P 500 up slightly (1.67%) and the Nasdaq solidly in the green (+8.79%) In most years, the summer is a time for travel and a little bit of a lull in business activity. Consumer confidence in the economic outlook is strong, and small business sentiment is optimistic. Domestically, conditions remain placid as interest rates are very low, energy supply is abundant at moderate prices, and the regulatory environment is, shall we say, pro-business, the tariff issue notwithstanding. The calm conditions are ideal for merger and acquisition activity, restructuring, and a full IPO pipeline.
Financials will be helped by the gradually lifting of interest rates and more volatile trading patterns in equities, fixed income, commodities, and currencies. Housing starts have rebounded to the highest level since 2007, although affordability remains a major concern. Higher mortgage rates aren’t a help, either.

On the corporate front, earnings season will begin in earnest in a few weeks with the banks and technology sectors the immediate focus. The energy area also will bring scrutiny with hope rising that the worst of the commodity cycle is behind us. The lack of transportation infrastructure in the Permian remains an issue in that region, especially for the price of WTI crude. As for the equity markets, June historically is nicknamed the June swoon, though it was not too severe this year. If earnings come through as expected, it may be that the tariff and interest rate problems proved to be a nice opportunity to find value in a fairly priced market.

Global Economic & Financial Markets Outlook: Global Economic and Financial Markets Outlook- Investors Retreat From Equities As Trade and Political Worries Trump Growth!l(Country index data provided by the Wall Street Journal, June 27, 2018.)

With the world mired in arguments about which geography is being taken advantage of and by what country, investors have decided to take their risk capital away. In Europe, better economic growth is being outweighed by a stronger dollar, tariffs, potential political change, and the end of quantitative easing. In Germany, Chancellor Merkel’s fragile coalition may not survive her prior lenient immigration policies. Those concerns have transferred across the rest of the region as well, including Austria, Italy, and Sweden. Let’s digest some of the gloomy results, shall we? Starting in Asia, China (down 12-18% depending on the index), the Philippines (-18.1%), Thailand (-7.4%), Indonesia (-8.3%), and Japan (-4.8%) have clearly been difficult areas while India stands out (+4.2%). It is not difficult to understand why, eh?
In Europe, major pain is found in the east, as a strong dollar and the reelection of Turkish autocrat Erdogan (-18.1%) have set the negative tone, clearly seen in the results of other countries like Hungary (-10.2%), and Poland (-11.7%) as well. It is noteworthy that the Turkish Lira has also slid dramatically over the year, down from 3.7 to 4.6 per dollar. Turning down under, there no safe haven found in emerging markets as Brazil (-6.5%), Chile (-7.0%), Mexico (-5.0%), and Argentina have all been difficult to own, as have their currencies. On July 1, Mexico will hold their national election and it appears there is a very strong chance that a long time socialist in the mold of Venezuela’s lovely ex dictator, Hugo Chavez, will win. It certainly is something to pay attention to and does not bode well for economic progress in Mexico. In terms of stability, the UK, Canada, and Australia are all slightly ahead of even for the year, which is interesting from the point of view of a common source of heritage (the UK for those of you forgetting your world history). Looking ahead, with QE ending and dollar strength dominating emerging market currencies, it will be interesting to see if that trend accelerates, holds, or fades.

The Art of Contrarian Thinking- Your Capital Is Scarce, So Choose Businesses You Want to Own!

(Y H & C Investments may have positions in companies mentioned in this newsletter. It is the responsibility of each investor to research possible investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives)

Most participants in the equity markets know they do not have unlimited amounts of capital, as opposed to a large institution or a famous investor that owns multiple billion dollar enterprises. Given that important constraint, as well as your precious time, by my way of thinking, you want to focus on owning pieces of businesses that you find superior than nearly anything else available. Usually, they need a long track record of demonstrated management excellence, by capable and honest leaders, and potentially many years of growth ahead. As an example, having grown up on the West Coast, there is a well known regional burger chain called In N Out Burger. The locations are logistically ideal and usually well placed. The menu is simple with only burgers, fries, shakes, and drinks, and not too many choices of any of these categories. The food is always fresh and tasty. When you go in, the place is typically busy, and the drive through always has lines, but those are navigated quickly. It has been this way for years. The only major problem is the owner has stated she will never take the company public. Naturally, I cannot buy it, but if it ever went IPO, I would buy it on the first day. I’ve always thought it is a great business, and it is these kinds of situations you are looking for. Sometimes the public markets offer nice opportunities on your favorite companies, and it usually pays to take them. Thanks for reading the monthly newsletter and good luck with your investments!

Investing money in capital markets involves risk and could result in losing money. Past performance is no guarantee of future results. Future results are likely to be different from past performance. All equity portfolios involve risk and may lose money. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile, liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, attaining or holding the CFA credential in no way suggests performance will be superior than a market index or market return.

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